Payback is a word with double meaning. It can imply something good or bad. Think karma in Buddhism and Hinduism. Karma suggests that every deed, good or bad, has its consequences. In other words, there is cause and effect for everything you do. When it’s payback time, you will see the result of your past action.
For instance, you put your money in an investment. When it reaches the payback period, your investment may breakeven and you get back your initial capital. You may even make some money or a profit. On the other hand, if you owe others something, you have to repay your debt one day. Similarly, if you make a mistake, you have to pay the price when it’s payback time.
How they punished the savers
The world has been deploying the same trick to tackle the 2009 global financial crisis and the 2020 global pandemic. There are different terms to describe it – quantitative easing, money printing, monetary loosening, cheap money or easy borrowing – they all mean the same thing.
For over a decade, under ridiculously low interest rates, the savers are being punished for putting money in the bank.
The savers lose out too. Retirees enjoying comfortable interest payments from their bank savings suddenly find the payouts lagging behind inflation. Banks don’t make money from savers. They make money from borrowers. Cold calls and spam messages are asking people to borrow, not to save. Approving commercial loans and selling financial products have far better margins than opening savings and fixed deposit accounts.
People have no choice but to withdraw savings from the banks to buy something, regardless of whether the investment is overpriced or with a low or negative yield. They gamble in the stock market. They buy overpriced properties. The concept of value is thrown out of the window. Buy something or do nothing. They are losing out either way.
– Vina Ip, Behind The Scenes of The Property Market
Payback time for savers
1. Payback for savers last time
There was too much travel, politics and stress in my last full-time job. My way to de-stress was to allocate some me-time on Saturday mornings.
I would go down to a foreign bank’s private banking branch in Orchard. There were only a few customers around. Every time I would look for the same officer to place a five or six-figure fixed deposit using my spare cash. The interest rates were quite low back then, somewhere between 1 to 2 percent.
Nonetheless, I enjoyed the relaxing casual chat with a professional yet friendly familiar face. Afterwards, I would proceed for a small retail therapy at a department store nearby, using the $30 shopping voucher the bank offered for fixed deposits.
The joy of buying gifts for others is always bigger than buying things for myself. I consider this a no-cost alternative to an expensive spa package. To me, both have similar therapeutic effect.
After doing this stress-relieving activity for years, one day I summed up the total amount of interest earned from these fixed deposits. To my surprise, they have added a high five-figure sum to my net worth. Despite the humble return, with principle protection it isn’t the lowest performing investment in my portfolio. Above all, I haven’t paid a single cent of management fee or government tax for it.
2. Payback for savers now
Nowadays fixed deposits can be placed online for most banks. For those that require visiting a branch, beating the crowd there is stressful rather than de-stressing. I guess this is the trade-off for high interest rates and prospering business in retail banking.
One foreign bank used to have their private banking branch also in Orchard. Then they closed all their branches and opened a new one in Raffles Place. Last November I paid them a visit and found zero customer in this nice new office. I was so afraid that they would close down their retail banking business in Singapore.
This month they offered one of the highest interest rates for fixed deposits. Their only branch was so crowded with long queues that I thought the bank was giving away free money!
I just placed a 12-month fixed deposit at 3.8 percent interest rate with them online. But I didn’t feel refreshing like what I used to be. Maybe I was expecting rates to continue shooting up. After all, there are other fixed income products that offer similar if not higher rates.
When I was a child, people used to say “This person is so rich. He can put money in the bank and live off the interest without working.” At the moment, retirees can really put their money in fixed deposits, saving bonds or government securities and live off the interest. They only need to schedule the maturity dates throughout the year so that there will be interest credited to their account every single month.
Finally, it’s payback time for savers!
My unforgettable payback story
Allow me to share with you again my personal experience of interest rate hike as a multiple property owner some time back.
The hikes in mortgage rates can be fast and frequent. In mid-2005, I was still paying an interest rate of 1.3 percent for my rental properties. After three to four rounds of interest rate revisions, it had already gone up to 4 percent by the end of 2006.
– Vina Ip, Behind The Scenes of The Property Market
I remember the last time when interest rates jumped like nobody’s business was in the year 2006 and 2007. Every few months the banks would inform me a revised higher interest rate and the corresponding higher monthly repayment. Some letters even had the effective backdated to a month earlier. As a result, I had no time (chance) to refinance or reprice to avoid paying higher interest.
Imagine you were a multiple property owner. All your investment properties would be affected by rising interest rates at the same time. Unfortunately, interest rates might be revised up a few times a year. But your tenants were still paying the same rent because it was fixed in the tenancy agreement.
– “What will happen to private homes with rising interest rates”, PropertySoul.com
I remember vividly how I kept refinancing my properties during the last rate hike period. In the midst of refinancing one of my properties, my first baby arrived and I was on confinement at home. Thankfully, the conveyancing lawyer kindly delivered the contract to my home in person for my signature.
However, judging from the crowd at the bank branches and the bulk of repricing or refinancing requests, I doubt such personal touch is possible now.
The higher the rates, the lower the transactions
Today (November 13) US 30-year fixed mortgage rate has risen to 7.32 percent. The last time it was this high is December 2000. For goodness’ sake, it was only 2.98 percent a year earlier on November 12, 2021.
As I am writing this post, all three Singapore local banks have suspended their fixed rate housing loan packages for the time being. As of November 11, 3-month SORA is 2.5947 percent. Like it or not, first year floating rate now starts from 3.295 percent for UOB, 3.575 percent for OCBC and 3.595 percent for DBS.
Compared with other countries, Singapore is a bit late in the rate hike game. Banks only started a slight raise this year. Customers didn’t notice it until this April. Then banks became more serious about increasing rates since end of June. They have become more aggressive lately. Very soon, rate hikes will be in “auto-pilot” mode.
Rising rate is the world’s fastest racing car. It accelerates all the way to drive homebuyers to reach their affordability ceiling. Unfortunately, Singapore’s private home market, especially the mass market condominium segment, is mainly fueled by HDB upgraders. As long as interest rates continue to escalate, transaction volumes will continue to go south.
According to URA’s third quarter real estate statistics, last quarter only transacted 6,148 private residential units. It is a 9.7 percent quarter-to-quarter drop from the second quarter (6,811 units) and a 32.3 percent year-on-year fall from 9,083 units in 2021 third quarter. Given that the third quarter is always the strongest performing quarter every year, the sales result is a big disappointment.
Furthermore, the volume of new sales from developers makes up 40 percent of total number of transactions. This might have explained the 4.4 percent increase in prices of non-landed private residential properties last quarter.
Payback time for borrowers
There is a price to pay for every debt after every bubble. The higher prices rise, the lower they fall.
New Zealand home prices have skyrocketed over the last two years. However, prices started coming down since the Reserve Bank of New Zealand raised rates the first time in seven years in early October 2021. Latest data show home prices dropping 11 percent from the peak in November 2021. Auckland and Wellington prices are down 15 percent and 18 percent respectively. Analysts expect prices to drop 18 to 20 percent, wiping out the gains in 2020 and 2021.
As of this September, around 2 percent of New Zealand mortgage lending was in negative equity (outstanding mortgage higher than home value). That percentage could rise to 7 percent if house prices fall a further 10 percent. With a further price drop of 30 percent, around 38 percent mortgage borrowers would be in negative equity.
In Singapore, the Minister of State for Trade and Industry said household debt as a whole remained healthy. The proportion of non-performing mortgages is now at 0.3 percent. The number of foreclosures is fewer than 30 so far this year.
However, the numbers can be misleading. Despite rising interest rates, borrowers under financial pressure won’t immediately default. It is only after prolonged delayed payment that they will receive a letter from the bank. The bank will only take action if they don’t receive any reply from the borrowers. Most of the time, the banks tend to work with the borrowers to restructure their loan to avoid foreclosure. The banks want their money back, not bad debts or repossessed homes.
Meanwhile, the property market will continue to have less buyers, lower volumes and more quiet. Prices will be stagnant for some time until asking prices are lowered by those sellers who can’t wait anymore.
Food for thought
Payback time has just started. The market is now returning all the cheap money it borrowed when interest rates were low. The questions are: When it’s payback time, who need to pay, what is the price to pay and who pay the most at the end.
This is a musical chair game. Those under the biggest financial pressure are homebuyers who bought most recently and borrowed the most (high amount and highest loan-to-value) from the banks.
For borrowers, be prepared to face the consequences of the choice you have made the past two years. Because lenders won’t let you off until you pay back the last cent you owe them. This is how they get even with you.
“Many countries, companies, investors and individuals think it is the new normal to keep leveraging, borrowing more, piling up debts and using new loans to cover old ones …
Unfortunately, you as a debtor cannot wash your hands off easily like the World Bank or Donald Trump, or devalue your country’s currency to lower your debt and pay back much less to your creditors. There is no loan in the world that the borrower is not obliged to pay back. Just like the popular quote in the Hong Kong gangster movies: It is you who make the choice. Be prepared for the payback.
There is always human greed before every financial disaster. When the time comes, some people have to pay the price. And this time there are a lot more people, including the greedy, the naïve and the innocent, are going to pay the price.
– “More investors are playing Russian roulette”, PropertySoul.com
If you need advice on property matters or residential properties in Singapore, you can check out my personal consultation service.
My new book Behind The Scenes of The Property Market is now available for preview and order online. You can also check out my online courses.
Thanks for sharing again, like to read your article, probably because the sentiments are similar. My parents said they used to get 10% from fixed deposits in the old days from OUB before government wanted banks to consolidate operations and taken over by UOB today. Back in the days, banks would give radios, wine, fans etc as a token of appreciation to attract customers to place money in their banks. Similarly, they do not like to pay interests to banks for reasons being they aren’t investors, they don’t know how etc, the investment tools and platforms weren’t available back then, technology wasn’t so advanced, they din have the right circle of influence (good and bad) so they are inclined to be savers and paid up in full back in the days where new HDB is only 30-50k. How things have changed nowadays, maybe the values too, among generation z.